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Price stability means low but stable inflation. This helps people and companies make economically sound decisions in their plans for the future and their salary requests, creating the right conditions for economic growth.

Only the central bank can create and issue currency. By changing the price of the money borrowed by the commercial banks and the amounts they can take, the central bank can affect the conditions for loans taken by people and companies. In this way the central bank can affect inflation.

When the central bank changes the prices and amounts of money the commercial banks can borrow, the effect is passed on into the economy as a whole, and particularly into prices. The monetary policy transmission mechanism is the various channels by which the central bank’s actions are passed into the economy.

The central banks of the euro area act to meet the goals of the single euro-area monetary policy in a decentralised way, doing so within the agreed solutions and principles that together are called the operational framework.

For people to have faith in a currency, the value and stability of that currency must be backed up, and this is done with the reserves of the central banks. Currency reserves have a key role in maintaining confidence in the economy and in supporting the stability of the financial system.

The Estonian Competitiveness Report is published once a year. Competitiveness is analysed through Estonian export capacity (relative productivity growth, changes in export indicators and similar) and relative price and cost competitiveness indicators.

The Labour Market Review discusses the most important trends in the Estonian labour market, labour supply and demand, institutional developments of the labour market, and other related issues. The review is published twice a year.

The financial system needs to be strong and able to stand up to risks. This is why Eesti Pank has taken various measures such as requiring additional buffers from the banks and setting restrictions that the banks must adhere to when issuing mortgages.

Even when preventative work has been done well, failures can arise in the banking system at speed, passing on into the economy and potentially causing wider damage in society. Eesti Pank, the Financial Supervision Authority and the government work together to resolve financial crises.

Central supervision of the largest banks in the euro area helps make sure that the banks are all analysed and assessed in the same way and that the risk assessments use a similar base. This then helps make all of the banking sector in the euro area more credible.

The Financial Stability Review is the main output of the financial stability analysis conducted by Eesti Pank. The review includes also the central bank’s assessment to Estonian financial stability and covers related policy measures. The Financial Stability Review is published twice a year.

The Structure of the Estonian Financial Sector discusses factors that affect the architecture and design of the financial sector in Estonia. It provides a background for understanding the development trends and risks described in the Financial Stability Review.

Financial accounts are accounts of the national accounts system, which reflect the positions of financial assets and liabilities, transactional and non-transactional changes of both the economy as a whole and different institutional sectors.

The functioning of payment and settlement systems is important for maintaining the stability of the national economic and financial system, avoiding interruptions to the circulation of currency, and allowing monetary policy to be implemented smoothly.

The Emergency Act defines cash circulation and payment services as vital services. The Eesti Pank minimum requirement is that the four largest banks operating in Estonia should restore at least 70% of ordinary banking services within 12 hours at most following a breakdown.

The research work of the central bank has four focuses: improvement of the macroeconomic and banking models; monetary policy research; research into the financial sector; and research into the real economy. Research results are published in the Working Paper series of Eesti Pank.

The Eesti Pank research awards are intended to recognise young Estonian researchers in academic economics. The awards are granted in two categories, one for doctoral work and one for master’s level work.

The central bank supports research in Estonia and abroad in several ways, with a programme of guest researchers and internships, organisation of joint conferences, membership of the Estonian Economic Association, and work with the doctoral schools of the University of Tartu and Tallinn University of Technology.

The Working Papers are summaries of the research conducted by Eesti Pank. The target group of the Working Papers includes, above all, economists and economic experts, and the papers are published often only in English.

Eesti Pank makes sure that there is sufficient good-quality money available in Estonia and works with the European Central Bank and other central banks in the euro area to release euro banknotes and coins into circulation.

Collector coins are legal tender, but their high value means they are more usually used as souvenirs and collectors items than as circulation coins. €2 commemorative coins are special circulation coins with a special design on the national side in commemoration of a particular event or topic.

Anybody can verify the authenticity of a banknote easily if there is a suspicion that it is counterfeit by just feeling it, looking at it and tilting it, checking the security features, or comparing it to an authentic banknote. If it is suspected that a banknote is counterfeit, the police should be informed.

Companies can return banknotes into circulation only once the notes have been tested to European standards. Companies can test cash using specially designed devices or, if they do not have any, manually.

Eesti Pank is a constantly developing organisation that adapts its work and its processes to its ever-changing environment and to new requirements. Our mission and vision, and our organisational values, tasks and strategic goals explain our position and our organisational structure.

Eesti Pank works together with international monetary and financial institutions like the ESRB, the EBA, the BIS and the OECD, and with the European Commission and the Council of the European Union. It also partners the central banks of other countries through the Eurosystem, the European System of Central Banks, and the central banks of the Nordic and Baltic countries. Eesti Pank represents Estonia in the IMF.

Eesti Pank is a constitutional institution that operates under its own statues and under the law. The central bank sets policy for the financial sector and supervises it and the Governor of the bank issues decrees that regulate the banking industry. All the main legislation governing the operation of Eesti Pank is listed here, with links to related laws and decrees.

Eesti Pank must publish information on its activities. Financial statements give an annual picture of the assets and liabilities of the central bank and of its revenues and expenses. The bank also publishes its balance sheet every quarter.

Eesti Pank releases regular announcements about its activities and about important economic policy questions. This is done through press releases, speeches, presentations, articles and interviews. There is a collection of photographs of Eesti Pank spokespeople in the photo bank. Eesti Pank also publishes press releases from the European Central Bank.

Eesti Pank is a constantly developing organisation that adapts its work and its processes to its ever-changing environment and to new requirements. The bank has 11 departments that employ a total of 230 colleagues.

The Annual Report gives an overview of the central bank’s activities in the reporting year and the financial statement. The annexes to the Annual Report include a list of decrees issued by the Governor of Eesti Pank, a list of decisions adopted by the Governing Council of the ECB, and a list of Eesti Pank's publications issued during the year.

Press releases

ECONOMIC POLICY COMMENT BY EESTI PANK

17.06.2002

WORLD ECONOMY

Economic activity enlivened in most major economic centres at the beginning of the year. Against end-2001, economic growth accelerated remarkably in the USA and to a lesser extent also in Europe and Japan

However, early optimism about the quick restoration of economic growth has somewhat subsided. Year-on-year, growth in all major economies, including Estonia's main trade partners, still remained considerably below the average of the recent years. At the moment, the outlooks of large economic regions (USA, euro area) are somewhat different - while in the euro area the problem still lies in the resumption of growth and slightly higher than expected inflation, then in the USA the main problem was the sustainability of growth. The raising of interest rates has been postponed to the second half of the year in both the USA and the euro area and this is particularly expected in view of the European money market rates.

Resumption of Economic Growth Is Expected by the Turn of the Year

The further consolidation of world economic growth in the second half of the year depends, first of all, on capital investments and private consumption. Currently, there are several obstacles to the acceleration of the growth of these spendings - high fuel prices, weak confidence of the developed countries' labour market and consumers, low utilization of production resources and continuing low profitability.

Almost all foreign economic forecasts, however, presume the resumption of economic growth in most major economies to the average level of recent years by the end of this year or the beginning of next year.

ESTONIAN ECONOMY

The economic growth of Estonia's major export markets was still low in the first quarter and compared the end of 2001 external demand has not improved for Estonian companies. In the majority of European Union countries import is still smaller than it was a year ago.

Low Export Failed to Support Economic Growth

Weak external demand affected the export opportunities of Estonian companies more and more at the beginning of the year. The slowdown of the growth of export and production volumes was registered in almost all major branches of industry and therefore the volume of Estonia's direct export increased by just 6.8% in the first quarter or 33% less than at the end of last year. Thus, Estonia's first quarter economic growth (3.6%) reflected the weakest external demand of recent years.

As in most international economic forecasts the restoration of faster growth of the world economy is expected only by the turn of the year, Estonian export developments are unlikely to provide any substantial support to our economic growth.

Domestic Demand Remains Strong

Against the backdrop of the weak growth rate of export earnings, domestic demand is strong. Although the decrease of international interest rates came to a halt at the turn of the year, instead of an increase it was followed by stabilisation. Besides low foreign interest rates, borrowing of companies and private individuals in Estonia is encouraged by our own financial sector. Due to the more favourable credit terms the loan rates of the real sector have dropped the lowest level of all times - in April the long-term average loan rate fell below 7% for businesses. As a result of all this, domestic demand grew faster than export at the beginning of 2002.

Current Account Deficit the Largest of Four Years

The fact that the growth of domestic demand exceeds economic growth points to the deterioration of the external balance of Estonian economy. The trade deficit and the deficit of the current account increased considerably in the first quarter. The increase of the services' import was a new manifestation of volatility.

The current account deficit of Estonia's preliminary balance of payments for the first quarter of 2002 amounted to 3.5 billion kroons, which is the largest deficit since the beginning of 1998. The ratio of the four-quarter average current account deficit to the gross domestic product has reached 8.1%. However, such a development can last only for a short time and the continuing of the current growth rate of domestic demand presupposes the restoration of export volumes already in the near future. Otherwise, the ever-growing reliance on borrowed money will lead to the further deepening of imbalance.

Maintaining of Competitiveness Requires Higher Productivity

In view of weak external demand, the increase of the average wage by 12.3%(1) in the first quarter raises justified questions. In the short run, the increase of wages and productivity may not coincide, but competitiveness is threatened when the growth of wages outpaces the growth of productivity in the longer period of time. In the first four months of 2002, the consumer price increase has followed the pattern of the euro area quite well, with the boost of electricity prices added in April.

The continuing strengthening of domestic demand and growth of wages on the same level as in the first quarter may also mean strengthening of inflationary pressures and pose a danger to the competitiveness of the Estonian economy.

(1)In principle, it is possible that in certain cases (reduction of working hours, changes in the structure of workers, etc) the total wage fund of the economy increases slower than the above-mentioned average wage indicator.

OUTLOOK

In the near future, external economic environment will favour, through low interest rates, the growth of Estonian domestic demand rather than the growth of the goods export through higher external demand. Therefore, the role of fiscal policy becomes ever more important in guaranteeing the internal and external balance of the Estonian economy. In the first quarter, the good collection of tax revenue was mostly based on one-time factors, such as indirect taxes resulting from the strong domestic demand and weakening export. In the second half of the year this tendency is expected to reverse.

In view of the deterioration of external balance in the first quarter and the temporary nature of the tax revenue improvements, all the sums received in addition to the planned revenue should be used to strengthen the income structure of the state budget. In case the current tendencies continue, the adoption of additional supplementary budgets should be ruled out.